Introduction to E-procurement
E-procurement (electronic procurement, sometimes also known as supplier exchange) is the business-to-business or business-to-consumer or business-to-government purchase and sale of supplies, work, and services through the Internet as well as other information and networking systems, such as electronic data interchange and enterprise resource planning.
The e-procurement value chain consists of indent management, e-Tendering, e- Auctioning, vendor management, catalogue management, Purchase Order Integration, Order Status, Ship Notice, e-Invoicing, e-Payment, and contract management. Indent management is the workflow involves in the preparation of tenders. This part of the value chain is optional, with individual procuring departments defining their indenting process. In works procurement, administrative approval and technical sanction are obtained in electronic format. In goods procurement, indent generation activity is done online. The end result of the stage is taken as inputs for issuing the NIT.
Elements of e-procurement include request for information, request for proposal,. request for quotation, RFx (the previous three together), and eRFx (software for managing RFx projects).
For example: Traditional procurement involves getting quotes and then approval, probably from finance, as well as a purchase order, which could take more than a week. With e-procurement, this process is simplified and speeded up considerably, thanks to real-time interaction with pre-approved suppliers and trading partners, who can be anywhere in the world. With online purchasing, the purchase can be approved online and the order completed within minutes; the required item often arrives within days.
In business, time is money, so the more a company can reduce staff time involved in purchasing, and the more quickly it issues a purchase order, the more it can reduce operational costs.
History of E-procurement
In its broadest sense, e-procurement involves electronic data transfers to support operational, tactical and strategic procurement. E-procurement has therefore been around for much longer than the term itself which first came into usage after the establishment of the internet in the 1990s. From the 1960s until the mid 1990s, e-procurement primarily took the form of electronic data interchange (EDI). Nowadays, e-procurement often supported by internet technologies and becoming more prevalent. The historic context demonstrated in the chart below:
Those involved in the procurement function need to understand the e-procurement concepts and tools to provide input into their development, use, evaluation and refinement as a means of improving procurement efficiency and effectiveness.
Procurement officers and managers can make a contribution to decisions about investments in, and configuration and use of e-procurement tools by:
- having a general understanding of the various e-procurement applications
- identifying the procurement processes that are effectively supported by e-procurement.
- understanding the sources of benefit of e-procurement.
- identifying the risks associated with the adoption of e-procurement.
- contributing to the development of e-procurement tools through identifying scope for e-commerce supported process improvement.
E-Procurement Tools and Applications
Some e-procurement tools and applications include:
- Electronic systems to support traditional procurement
- EDI (electronic data interchange)
- ERP systems
- Internet as a support or complement to traditional procurement
- Electronic mail (e-mail)
- Web enabled EDI
- Extensible markup language (XML)
- World Wide Web (www)
- Internet tools and platforms that replace traditional procurement
1. Electronic Systems to Support Traditional Procurement
These include mainframes and personal computers (PC), Electronic Data Interchange (EDI) and Enterprise Resource Planning (ERP).
2. EDI (Electronic Data Interchange)
EDI is an application whereby electronic messages can be exchange between computer programs of two separate organizations. Some features of EDI include:
- Messages exchanged in groups, known as batches.
- Messages can automatically sent, transmitted and stored between computers without retyping or keying data.
- EDI has to implemented by each pair of organizations (sender and receiver) who wish to use it. This means that the implementation costs of EDI are relatively high.
- EDI mostly use where the messages exchanged concern such matters as orders, confirmations, transport information and invoicing.
- EDI traditionally runs on so-called, “Value Added Networks”, which are close networks (unlike open networks like the Internet).
3. ERP Systems
ERP systems are management information systems that integrate and automate many of the business practices associated with the operations of a company or organization. These systems typically handle the manufacturing, logistics, and distribution, inventory, shipping invoicing, and accounting for a company or organization. ERPs aid in the control of many business activities, like sales, delivery, billing, production, procurement, inventory management, and human resources management.
4. Internet as a support or complement to traditional procurement
There are various types of internet based applications that serve different purposes. Some well-known applications that use the internet described below:
5. Electronic mail (e-mail)
Email is an Internet based application through which electronic messages are exchanged between people.
6. Web enabled EDI
Web enabled Edi is like traditional EDI, but run on the Internet; also known as EDI-INT.
7. Extensible Markup Language (XML)
XML used to allow for the easy interchange of documents on the World Wide Web.
8. World Wide Web (WWW)
The WWW is a major service on the Internet. The World Wide Web has made “Web servers” that store and disseminate “Web pages,” which are “rich” documents that contain text, graphics, animations and videos to anyone with an Internet connection.
9. Internet Tools and Platforms that Replace Traditional Procurement
Some internet tools and platforms that replace traditional procurement include:
- E- auctioning
- E-ordering and web-based ERP
E-Sourcing supports the specification phase; it can be used to pre-qualify suppliers and also identifies suppliers that can be used in the selection phase. For suppliers the benefit is: “marketing” and for the buying organizations the benefit is facilitating the sourcing of suppliers. The UN Global Market Place (UNGM www.ungm.org) is an example of an E-Sourcing tool.
E-Tendering supports the selection stage and acts as a communication platform between the procuring organization and suppliers. It covers the complete tendering process from REOI via ITB/RFP to contracting. Usually including support for the analysis and assessment activities; it does not include closing the deal with a supplier but facilitates a large part of the tactical procurement process. It results in equal treatment of suppliers; transparent selection process; reduction in (legal) errors; clear audit trial; more efficiency in the tactical procurement process and improved time management of tendering procedures. Some UN organizations such as UNDP-IAPSO and UNHCR have used E-tendering in the formulation of long-term agreements for vehicles, tents, motorcycles and pharmaceuticals through an in-house developed tendering portal.
E-Auctioning supports the contract stage. It enables the closing of a deal with a supplier if parties agree on price. They operate with an upward or downward price mechanism e.g. E-Auctioning with upward price mechanism for the selling organization and e-reverse auctioning with a downward price mechanism for the buying organization. They can be made in accordance with traditional ITB/RFP. They are internet based using open or closed systems.
E-Ordering and Web-based ERP:
E-Ordering and Web-based ERP is the process of creating and approving procurement requisitions, placing purchase orders, as well as receiving goods and services ordered, by using software systems based on the Internet.
E-procurement in the Procurement Cycle
The figure below shows the six forms of e-procurement plotted in the procurement process.
Each of these forms can be explained as follows:
- E-sourcing supports the specification phase; it identifies suppliers that can be used in the selection phase.
- E-tendering supports the selection phase; it facilitates the REOI and ITB/RFP activities, usually including support for the analysis and assessment activities.
- E-reverse auctioning supports the contract phase; it enables closing a deal with a supplier;
- E-ordering and web-based ERP is the process of creating and approving procurement requisitions, placing purchase orders, as well as receiving goods and services ordered, by using a software system based on the Internet.
- E-informing is not directly associated with a phase in the procurement process; it is the process of gathering and distributing procurement information both from and to internal and external parties using Internet technology.
E-Procurement Strategy- Costs, Benefits and Risks
Business cases aimed at adopting or enhancing e-procurement tools are often prepared by information technology and/or finance specialists. However, some of the most successful e-procurement implementations have been driven by those who best understand the procurement processes and outcomes to be achieved. Because of their understanding and proximity to procurement processes, those involved in the procurement function have a key role to play in identifying and assessing the costs and benefits of e-procurement tools and in providing input into how existing tools may be enhanced.
The following costs and benefits as identified can influenced by e-procurement:
- The cost of expenditure on goods/services related directly to the production/service delivery.
- Cost of non-production of goods and services.
- The cost of operational procurement activities – e.g., requisitioning, ordering, expediting and administrative support.
- Cost of tactical procurement activities – e.g., formulating specifications, selecting suppliers, negotiating with suppliers, contracting, disposals etc.
- The costs of strategic procurement activities – e.g. spend analysis, transaction analysis, market analysis, planning, developing procurement policies etc.
- Internal benefits arising from investments in particular inter-organizational relationships.
- The contribution of investments in particular inter-organizational relationships to revenues.
Benefits of e-procurement:
Particular benefits of e-procurement in the public sector are thought to include greater transparency in procurement through electronic publishing of tender notices and contract awards. This in turn is likely to enhance accountability and reduce the instances of corruption.
When developing a business case for adopting or enhancing an e-procurement tool, it is important to assess the baseline benefits and costs associated with the process or processes to automate in order to understand the probable outcomes of e-procurement adoption or enhancement. In essence, it is important to understand what will change and how it will change when an e-procurement tool will implement.
The implementation of e-procurement tools carries certain risks. One of the primary risks is missing opportunities to implement strategies that improve procurement management without the need for investment in e-procurement.
Another risk is over-investment in e-procurement tools that do not deliver the expected benefits. This risk arises when there has been inadequate evaluation of the implications of the adoption or enhancement of e-procurement tools. The risk that users will not accept an e-procurement tool is another common risk. This risk often arises where users have not adequately consulted about the adoption or enhancement of particular tools.
On the supply side, there is a risk that suppliers will not cooperate with the use of e-procurement tools. For example, some suppliers are sufficiently powerful to insist on the use of paper-based systems. Others may not have access to affordable internet based technology that would give them access to the e-procurement tools of purchasers. In markets that are already competitive with low profit margins, suppliers may choose not to participate in e-reverse auctions.